V372: Trexler
Government Finance
&
Budgets
Fiscal Administration, 9 th Edition
John Mikesell
Chapter 2: The logic of the
Budget Process

Purpose of Financial
Reporting
► Provide

transparency to public officials, the public, and the investment community

► Improve
►A

accountability

tool for evaluating operating results, fiscal health, and the appropriate level of services Accounting Standards
► Boards

set the rules

 Financial Accounting Standards Board
(FASB)
 Government Accounting Standards Board
(GASB)

► Focused





on:

Revenues & Expenditures
Assets (items of value)
Liabilities (debts)

► Elements

of a good reporting system:

 Understandability, Reliability, Relevance,
Timeliness, Consistency, and Comparability

Government Accounting
►

Focused on cash flows and transparency

 Private sector accounting focused on profit and loss

►

Legal budgets

 Budgets represent adopted appropriation law rather than a flexible plan

►

Debt & fixed assets are typically separated from operations  Little fixed asset accounting before GASB 34
 Difficult to value assets
 Why do we need to?

►

Fund accounting

 A set of accounts that record assets and liabilities related to a specific purpose (like a bank account)
 Separate fund to account for each activity of a government
► Permits
► Permits

compliance with legal restrictions on cash flows administration of multiple operations

Types of Funds
► Governmental Funds
 General funds
 Special revenue funds
 Debt service funds
 Capital projects funds
► Proprietary Funds
 Enterprise funds
 Internal service funds
► Fiduciary Funds
 Pension funds
 Trust funds

Elements of the Accounting
System

► Procedures

and controls

 Instructions for classifying, recording, and reporting transactions
► Source

documents for transactions

 Receipts, invoices, original documentation
► Journals

 Detailed listing of accumulated transactions
► Ledgers

 Summary of account balances

Accounting Basis
► Cash

 Revenue recorded when cash received
 Expenditures recorded when cash gone

► Full

Accrual

 Revenue posted when earned
 Expenditures recorded when liability incurred

► Modified

Accrual

 Revenue recorded when cash received
 Expenditures recorded when liability incurred

What is a Budget?
► Projection
► Plan

of expenses and revenues

for the allocation of scarce resources

► Plan

for the provision of services translated into financial cost

► Prediction

of the likely operating conditions for the upcoming year

► Plan

for addressing those conditions

Purpose of the Budget
► Fiscal

discipline and control

 Restraining expenditures to available financing  Legal control / Legislative intent
(appropriations)

► Response

to strategic priorities

 Ensure the highest priorities of the community are funded
 How do we determine priorities?

► Efficient

operations

 A tool for managerial control
 A tool for evaluating operations

Components of the Budget
►

Budget Overview
 What the government expect to do & how it expects to do it
 Expected state of the economy
 Program Highlights
 Revenue & expense summaries
 Other useful data

►

Revenue forecast
 Funding sources & revenue estimates

►

Financial Plan
 Detailed lists of the costs with comparison data

Budget Classifications
► Functional

 Broad purposes like education or defense
► Administrative

 Agencies, departments, or divisions
► Economic

 Types of expenditures
 Major Categories
► Personnel,

supplies, services, and capital

 Line items
► Salaries,

health Insurance, payroll taxes, …

Comparison Data
► The

final-report year (past)

► The

progress-report year (current)

► The

budget year (proposal)

► Out

years (future)

 Results of the most recently completed year vs. the original budget
 Progress for the current year vs. current year budget  Should include previous vs. current year columns showing the change over time
 Forecast of multiple years